Regulation rules. Europe’s Commission and DOT on oneworld and US attack on ancillaries

In both Europe and the US, regulators and governments are making the news. In Europe, the European Commission gave the go-ahead to the merger between British Airways and Iberia, as well as sanctioning tighter cooperation amongst the oneworld alliance members. This was quickly followed by the US Department of Transportation’s (DOT) grant of oneworld’s ATI request, also involving American Airlines. Meanwhile also in the US, legislators addressed, with apparent glee, the prospect of regulating ancillary charges. These are the latest developments in ongoing processes of oversight whose validity many question. Progressively (or regressively) and obsessively, regulations are seeping into almost every crack opened up by deregulation over recent decades.

More choices? From the EC?

Following years of discussion, the oneworld case was finally settled. Though required to shed some alliance slots at London Heathrow (LHR) to boost competition to Boston, New York, Miami and Dallas, the price was palatable for the carriers involved.

However, given the stranglehold that American has at both Miami and Dallas, it is difficult to imagine that there will be a long queue to claim these routes. And with British Airways dominant at LHR, the ability of others to feed/defeed the transatlantic segment is very limited.

Even considered from an Alliance standpoint, SkyTeam and Star activity at both MIA and DFW is limited mainly to hub connections, meaning that there is little incentive to open an expensive Heathrow operation to either gateway. If the slots could be utilised to Atlanta, Detroit, Washington or Philadelphia, the concession might have a greater appeal. Did the EU regulators really serve the greater good in their ruling – several months in the making?

And then there’s New York

With nearly 30 widebody services each day between London and New York, it is difficult to envision the slot swap as having significant impact. The clear beneficiaries here are Delta and Continental. And in Boston, dominated now by JetBlue, any service by a new entrant would be an orphan flight, again up against more frequency and loyalty provided by the oneworld pair of American and British Airways.

A key component of the oneworld application was the decades-long furore over Heathrow, which has figured prominently in the strategies of both the EU and the US. With the recent Conservative government decision to scrap the third runway, the discussion becomes mute and the boundaries of capacity are fixed.

Certainly the allocation of those now more-valuable slots will remain a point of discussion, but the conversation is now about rearranging the furniture rather than enlarging the room.

One can reasonably assume that any regulatory rulings regarding allocation will be challenged and one wonders how policy strictures will be amended to deal with the new, fixed reality. Not only do incumbent carriers wish to increase their LHR presence, but also new or returning players, Garuda Indonesia being one example, will be looking for slots as well.

Perhaps the EU should give more thought to the wise and fair management of its resources and spend less time on “protecting” the consumer since adequate access and resource allocation are primary ways of ensuring fair play.

All this rearranging may actually have very little effect on the market and prompts the question as to whether or not the EU ruling will serve the greater good. As with regulators in other cases, the long-awaited outcome may be little more than a solution to a problem that no longer exists.

Madrid rising as an alternative hub

But the approval does have real benefits for oneworld carriers and customers; creating a different and more level competitive field.

What will likely happen, coupled with the Iberia merger, is a new focus by oneworld on alternative connections utilising Madrid rather than the always crowded and apparently non-expandable Heathrow. Increasing connections and alternatives via Madrid could provide relief for London and still allow oneworld travellers full alliance benefits.

It is this new mix and match, earn and burn facility that will probably be the primary benefit for customers, eliminating the disadvantages previously experienced by oneworld members. With oneworld’s entry into the immunised world, travelers will have a full buffet of North American and European hubs from which to choose. Meanwhile, Star has several and SkyTeam enjoys Paris and Amsterdam.

Now, it's time for more rules and taxes in the US

Then, as reported in full by CAPA last week, in the US, the battle over ancillary charges and fees has reached the point of federal legislative notice, with the battle being joined by those on all sides.

The airlines, and especially those on the leading edge of tariff reform such as Spirit Airlines, are keen to protect their new ancillary revenue streams. Ben Baldanza, Spirit’s CEO, vigorously defended unbundling as a way in which to price the basic transportation product and then allow customers to choose those additional features that are required or desired by individual travelers.

Meanwhile legislators, those watchful stewards of the national till, suspect that there is untaxed revenue that currently eludes their grab and, certainly in the interest of fiscal responsibility, want a part of it. As reported, some on the committee appeared to be more intent on bashing the business than on doing their job, which is to ensure full disclosure.

Regulation of some functions is critical, but where does it end?

Aviation, because its constituent members cross borders with ease, inevitably requires a different sort of coordination and oversight than say, bus travel. Improperly maintained or serviced equipment poses a different kind of risk, making standards and regulation necessary. Few would quibble with the role of overseers in such vital operational areas.

But comment rarely stops at that border. While not a specific focus of these hearings, there are other matters pending, such as the United/Continental merger and the regulatory bias towards trying to manage the industry in ways perceived as “proper” has already emerged.

The problem comes in that most regulatory bodies believe that they still have the mandate to oversee and micromanage the business models as well. And that creates a very complex and unpredictable mix. Many regulators still apply standards of operation that were valid decades ago but fail to recognise a changed landscape. It's almost as if it passed down in the regulators' DNA.

What is seen in regulatory bodies worldwide is a tendency to regulate for the status quo rather than create an operations and oversight structure that conforms to the real world. This pattern is not exclusive to the US or EU, but is reflected in the policies and decisions of regulators worldwide.

At the recent IATA conference in Berlin, Indian regulators were publicly challenged over policies and requirements that have hobbled the development of Indian aviation.

Furthermore, they often apply different standards for legacy airlines and new entrants. In the US, charges at United or American are scrutinised differently from say, Skybus, whose business plan probably deserved more investigation.

At issue, and well represented by the interaction between Mr Baldanza and the committee, are the boundaries of regulatory intrusion. While the regulatory mandate includes making certain that ancillary fees are fully disclosed, this should not give the regulator the right to make judgments on behalf of the customer as to the efficacy of the charges: that is surely a function of the market and individual consumer decisions and the crux of Spirit’s policy.

Some questions for the rulemakers.

There are some questions that regulators should consider, as they administer and, frequently, regulate.

1. Who decides what the ticket price should include?

There was a time, not too long ago, when purchasing an airline ticket was known to include a predictable list of items. This included a baggage allowance, often a meal, usually use of pillows, blankets and perhaps magazines. Often seating could be chosen in advance and generally the traveller only needed cash if they wanted to buy a drink.

Those days are past, but many regulatory bodies view unbundling as a breach of trust with the customer--which it may be—but that is surely a market decision. The role of regulators is not to be aghast at change an excoriate those who implement it as was the case with Representatives Peter DeFazio and Laura Richardson. Their only role should be to ensure that the tariff changes and applicable charges are clearly and openly displayed, leaving the acceptance or rejection of the fees in the hands of the customers - ie that they are not intentionally or even accidentally deceptive.

We have seen instances where the market is unwilling to follow, as was the case with US Airways’ charging for all drinks. General discontent and the unwillingness of others to follow suit made US sensibly rescind the decision and return to the mainstream. Consequently, if there are those who believe that an airline that charges for carry-on remains a good value, there is little need for regulators to intervene - even if the media loves to challenge the practice, with extreme examples.

2. Shouldn't national aviation policies recognise the international environment?

In the past 10 years, the face of global aviation has substantially changed.

  • Alliances allow partner services to operate in lieu of own-carrier flights and frequent travellers can view their ultimate allegiance as being alliance, rather than carrier based.
  • New airlines like Ryanair and Air Asia consistently defy classification according to traditional national borders. Even legacy carriers like LAN, Lufthansa and Air France-KLM operate as trans-border businesses.
  • The Gulf carriers have emerged with a new operating model that is designed to specifically target sixth freedom traffic, making them primary players in markets far from their home base.

And yet, in almost every geography, regulators continue to apply local parameters that were developed in a regulated and border-defined environment. Absent updated thinking, regulators will continue to debate and implement “policy” that has little relevance to the real world, let alone the rest of the world.

3. Taxation

In most geographies, regulators also manage taxation of aviation. As seen in the current US debate on ancillary fees, the urge to extract monies from airlines is virtually limitless. As was cited in the congressional inquiry and unlike many other industries, aviation activities are fair game for almost any tax that the government or regulators wish to impose—with the British APD a prime example.

With perhaps the exception of motor fuels, few other goods or services are taxed at similar rates. The willingness of overseers to arbitrarily increase those amounts in other economic sectors would lead to open consumer revolt. Imagine, if you can, government taxes on broadband access being keyed to usage—or taxes on wireless services adding 25%+ to the base price—hotels excepted, of course.

Widely disparate amounts, depending on local policy and need, indicate the capricious way in which taxes are determined and levied, resulting in considerable differentials in the cost of a ticket to consumers.

It is with some irony that regulators become so incensed at ancillary fees when they, using their authority, often are responsible for upwards of 25% of the total fare collected. The answer is clear—because they can.

Cornell's Regulation Room

Cornell University, in conjunction with a project jointly funded by the National Science Foundation and Google, has established a new project called Regulation Room (www.regulationroom.org).

The site invites consumers to vote on a number of issues concerning passenger rights. They are:

  • Tarmac delays
  • Oversales
  • Flight status information
  • Pricing and advertising
  • Baggage and other fees
  • Customer service plans
  • Peanut allergies

The introduction to the site gives this explanation:

"New federal airline passenger protections took effect in April, but they were only a first step. The new rules don’t cover all airlines or airports. And passengers still don’t have a clear set of rights in many important customer service areas. The Department of Transportation (DOT) now wants to fill these gaps, and it's asking for public feedback. Here, you can find out what additional passenger protections are being considered -- and have your say about whether or not DOT is on the right track in dealing with tarmac delay, bumping, extra or hidden fees, and other air traveler concerns".

Cornell describes the initiative as a “work in progress” and hopes that it will act as both an educational forum regarding federal rule-making as well as providing a way for individual consumers to vote and comment on proposed government actions.

Its results are non-binding on regulators and this broader appeal for public comment may or may not actually have a visible effect on the final regulatory decisions. Nonetheless, it is a bold idea, allowing ordinary citizens to participate in regulatory processes that have until now been confined to a set list of presenters, each with their specific barrow to push.

It has the possibility to become a powerful tool for change—or for the retention of the status quo. On the other hand, any form of regulation by democracy leaves itself open to many of the same criticisms as the often-populist official responses.

Certainly, the game has changed and the rules need to be revised and updated. If FIFA is willing to consider instant replays in football, perhaps it is time for other governing bodies to examine their motivations and relevance?

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